Endeavour Group benefited from the pandemic and is facing a slower pace of growth in the short term. Into the future, there is ample opportunity to improve its already large hotel portfolio and retail liquor store network.
EDV’s shareholder proposition is:
- Sales above market. With close to 45% of retail liquor sales share in Australia, there is still room for more small format stores, more online share and to acquire more pubs.
- EBIT margin expansion. EDV is expecting EBIT margin to grow ahead of sales based on a mix shift towards Pinnacle Drinks sales and more Hotel earnings.
- Dividend payout 70-75%.
- Capex of $400 million plus. Guidance is for capex of $320-460 million in FY23f, but this excludes investment in IT and hotel redevelopments although these are more likely to feature in FY24f. considering that, we think capex will comfortably exceed $400 million pa over the next 3 years.
The group’s Pinnacle Drinks division is less well understood and is an evolving segment. It currently represents 15% of EDV’s retail sales and we think 30% of group wine sales are due to Pinnacle Drinks.
Pinnacle’s wine buff customers tend to spend more than the average EDV customer so the strategy leans towards providing own label premium brands across the range.
Interestingly, Pinnacle owns a handful of vineyards, a premium commercial winery, 3 estate wineries as well as distribution channels and branding/marketing capability. EDV says it is in the ‘early stages’ of leveraging its capability across Hotels. This is a nod to the company’s past where investment in the Hotels division was arguably suppressed under WOW’s management.
Now unshackled and with its own balance sheet, EDV sees plenty of long term opportunities to redevelop properties and offer a far better product to the entertainment market.
As an example, the Forest Hotel was redeveloped for about $20 million and now provides an expanded food and beverage offer, a new sports bar with outdoor dining and gaming room, plus an attached Dan Murphy’s store with 180 car park spaces.
EDV has 49 freehold sites (344 hotels total), and the company sees development upside in at least half of these. The company would partner with a developer and commence activity in FY24f. Each site could require $15-30 million for redevelopment so the site selection will be gradual.
Gaming earnings contribute about 70% of Hotel earnings. This is another area of steady improvement as EDV will aim to lower the average age of its EGM fleet to 5-7 years (currently 7.6 years).
The group’s digital platform, endeavourX, manages its eCommerce and loyalty programs. Group online sales in FY21 reached 8.4% of total sales, but with an active loyalty program membership around 4.4 million, there is scope for upside in sales and earnings. The store network plays a crucial role as it provides fulfilment for click and collect sales (42% of online orders are picked up in store).
The retail liquor store network could expand with more smaller stores. EDV has said it can identify 500 locations in Australia for more Dan Murphy’s or BWS sites. At 251 and 1,392 stores respectively, both brands are well represented across Australia and generate over $10 billion in annual sales. The availability of liquor licences might be a restricting factor to store expansion.
Investment view
EDV is facing the same cost headwinds as many businesses amidst a normalisation of sales postpandemic.
The growth strategy laid out by EDV really begins to take shape from FY24f onwards and offers an array of opportunities to enhance earnings.
The strategy presentation was the company’s first since demerging from WOW last year and it set out a sensible plan for growth. Now that COVID-19 impacts are largely finished, the job of growing the business is laid out and now requires good execution and plenty of capex. While the strategy is engaging, in our view the stock is fairly priced around 24x FY23f consensus eps.
Risks to investment view
EDV operates in the liquor, gaming and tobacco sector which are areas of close public and government scrutiny. Changes to relevant regulation or taxes could affect earnings.
Recommendation
We have retained our Hold recommendation.
